Santa’s Gift to Builders: Higher Home Prices

A home constructed by David Weekley Homes last year in the Houston suburb of Sugar Land, Texas. David Weekley Homes saw its fourth-quarter home sales in the Houston area increase compared with the same period in 2012.

Did home builders regain their pricing mojo in December?

Several measures indicate that builders again started hiking prices last fall as buyers regained a bit of confidence in the market. A monthly survey of builders conducted by housing analysis firm John Burns Real Estate Consulting Inc. found that 24% of respondents raised their prices in December, up from a recent low of 19% in November.

The Burns survey, which included 231 respondents, also found that the percentage of respondents who lowered their prices declined to 8% in December from a recent high of 12% in October.

“The pricing environment notably improved,” said Jody Kahn, a senior vice president at Burns who organizes the monthly survey, which covers an estimated 10% of the U.S. home-building market. “It’s still not back to where we were earlier in (2013) with builders raising prices aggressively.”

Indeed, in many months in early 2013, Burns’ survey found that more than half of respondents had increased their prices. Double-digit percentage increases from 2012 levels were common in markets such as California and Arizona.

For the first 11 months of 2013, average new-home prices exceeded $300,000, a level rarely achieved since 2007, according to the U.S. Census Bureau. Of late, the average price has risen from $310,800 in August to an all-time high of $340,300 in November. However, the Census data is notoriously volatile and often gets revised. Census is scheduled to release its December figures on Jan. 27.

The recent price increases come after summer months in which buyers balked at higher prices and sales suffered in consequence. In addition, a steep increase in long-term interest rates to 4.57% in September from 3.35% in May rattled buyers.

In recent months, the dynamics have changed, as interest rates have remained fairly steady around 4.4% to 4.5%, and federal lawmakers have made progress toward resolving previously contentious budget and debt-ceiling issues. Meanwhile, the country has added jobs at an encouraging, if not always steady pace.

Those signs are starting to bring momentum back to the new-home market, at least in terms of prices. Michael Gapen, senior U.S. economist at Barclays, expects home prices to increase by 7% to 8% this year on top of last year’s gains of 11% to 12%.

Gene Swang, a division president for closely held builder David Weekley Homes, said his division in booming Houston notched 80 home-sale contracts in the fourth quarter as compared to 71 in the same period a year earlier.

Buyers “know that builders tend to make price increases at the first of the year,” Mr. Swang said. “I think customers are concerned that if they didn’t get a home under contract (in December), they’d see higher prices in another month.”

Burns’ Ms. Kahn posited that the apparent rise in prices indicates that fewer builders are employing sales incentives to entice buyers. Incentives can include offering free upgrades such as premium flooring or providing financial assistance such as covering part of a buyer’s down payment.

The Burns survey found that, in contrast to rising prices, sales volumes declined in December by 5% from November levels. That is typical, however, as builders and buyers often focus on finalizing pending deals in December rather than generating new contracts. Ms. Kahn said the historical drop-off from November to December is 6%.

In addition to the seasonal decline, sales are down from last year. That’s not surprising, since sales were robust in late 2012 and early 2013 when prices were lower. Respondents to the Burns survey reported that last month’s sales were 5% less than those of December 2012.

Dennis Webb, vice president of operations at Fulton Homes, a closely held builder in Tempe, Ariz., said Fulton put 20 homes under contract last month as compared to 30 in December 2012. He sees conflicting signs at the onset of the busy spring selling season. “January is the start of our great selling season, but it just hasn’t materialized yet,” Mr. Webb said. “But traffic is up on both our website and in our sales office.”